Starbucks' Strategy U-Turn

For many years now Starbucks has been lauded as the example of strategy that disproves the notion that close proximity of company-stores cannibalize each other's business. In fact, there are lots of management articles claiming that the seemingly epidemic-like proliferation of new Starbucks shops was proof that the market was "unsaturate-able".

"It is simple: saturate the market. The accepted business model at the time was to spread out the location of your chain outlets so as not to cut the profits of one store from another. Typically, stores would place their retail outlets in locations based on demographics, traffic patterns, the location of competitors as well as the location of its own stores. However, the Starbucks strategy went against the grain. Instead of following the trend, CEO Howard Schultz had a different idea. He decided that the Starbucks strategy would be to blanket an area completely.

Instead of worrying about stores eating up each other’s business, the Starbucks strategy focused on heavily increasing the foot traffic in one specific part of town. Not only would this cut down on the company’s delivery and management times, but also it would shorten the waiting lines for customers at each individual store and hopefully increase overall traffic. Schultz knew that his Starbucks strategy was a risk, but it was one he was willing to take.

In the end, the unique Starbucks strategy paid off. Clustering its stores in one area helped Starbucks quickly achieve market dominance. With over 20 million regular customers per week, no other American retailer can claim a higher frequency of visiting customers. Since the company went public, sales have risen roughly 20% each year. Even when the rest of the economy seems to be in a slump, loyal patrons keep returning to Starbucks for their regular cup of Joe. " (click here for full article)

If you, like me, were one of the doubters, you should feel vindicated. Starbucks is joining the legions of companies laying off employees -- 12,000 of them -- and closing 600 under-performing stores. Why? Well, it turns out that people are not as lazy as once believed, and stores across the street from each other share some of their customer base with each other. That means that a new shop doesn't earn its keep through the creation of a whole new marketplace.

Apart from the gloating opportunity that this is, there is a strategy lesson to be learned. The assumption that endless growth would ultimately saturate the market -- coupled to the belief that the saturation point was far off in the distant future -- underpinned the entire Starbucks strategy. That assumption also had an ancillary piece: that competitors would be squeezed or locked out by virtue of the seamless net of Starbucks shops. Neither assumption turns out to be true. The first for reasons already stated, and as for the second, the competitors continue to come. None can take away Starbucks' ownership of the space, but they certainly eat away at its dominance.

It's sad that Starbucks has taken so long to realize its error, and that so many will suffer as a result, they are demonstrating the notion of scientific strategizing. When the cause and effect relationship isn't borne out by the numbers (albeit by virtue of lagging indicators which come a bit late to avert disaster) the hypothesis must be reexamined. The reexamination was what the plunging stock prices were suggesting. At last, the advice has been heeded.

Thanks for the object lesson Starbucks!